Succeeding at succession: Estate planning, uncomplicated

The scope of wealth management extends far beyond just creating and growing wealth, opines Amit Rathi of Anand Rathi Financial Services.

Amit Rathi, MD, Anand Rathi Financial Services
Amit Rathi, MD, Anand Rathi Financial Services

It is among the biggest ironies of life, that sometimes, a significant portion of one’s life needs to be spent, planning for what should happen after it. That said, the importance of this kind of planning is undeniable. However, this is something that individuals often undertake themselves, at the most, enlisting the support of a lawyer. While this might well be par for the course for a lot of people, high net-worth individuals (HNIs) and ultra-high net-worth individuals (UHNIs) would be better off traversing the road less taken, but mostly guaranteed to steer them in the right direction, as far as their wealth is concerned.

History tells us that the high-rollers of ancient Egypt would, in the fashion of their Pharoah, choose to be entombed after death, along with a significant portion of the wealth they had accumulated over the course of their lives. Their families would have to get by as best they could, with whatever remained. A pity, then, that they did not have the services of an effective wealth manager, who would undoubtedly have advised them to engage in an often under-appreciated, yet critical exercise: estate planning.

Planning for the safety and distribution of one’s wealth is no less important than its creation through high returns on investments. This is because, while we can plan for our tomorrows, there is no way to plan our tomorrows. In today’s world, ‘anything can happen’ has become more than vague prediction; it’s a truth. Acknowledging this and moving forward accordingly means that estate planning is something that must be factored into one’s wealth management strategy.

Now, when one rises – or has risen – to the top, the distance to the ground correspondingly increases. There is, then, much wisdom in setting up what is known as a ‘safety net’ as a safeguard against the encumbrance of one’s hard-earned, strategically created wealth. This is precisely what estate planning helps you do – create a safety net.

Safety nets are basically measures you take to protect yourself and your family against the fallout from unforeseen personal or business problems. If employed appropriately, they form a legal ‘shield’ that guards your wealth from irreparable damage or unrecoverable loss.

In this instance, the safety net would need to comprise of two primary components – the Private Trust, and the Will. To understand these better, it will be important to explore the process of estate planning, going into some of the nuts-and-bolts of how it works.

Estate planning essentially comprises of consolidating wealth, preserving it, and transferring it to future generations. It involves three key steps, meant to be taken in a chronological manner, to ensure that the estate planning is holistic, and appropriately done. The first step is to prepare a balance sheet consisting of both, assets and liabilities, both, as in the present, and those projected or estimated in the future. This will allow a planner to arrive at your overall or ‘net’ asset. Once this step is done, the second step is to bucket the net asset into various and varied allocations as per one’s plan for the wealth. The third step, then, is to execute these in the form of a Trust and a Will (either or both, depending on what you require).

Trusting in the Trust: How important it is?

Creating a private trust is imperative to ensure that your loved ones are taken care of financially, if, as and when things go downhill either for reasons of health, or otherwise. In this day and age, business crises, family disputes and other such circumstances aren’t all that uncommon. For instance, if you have a successful, thriving business, all it can take is a single, unexpected complication or mishap, to encumber your wealth. In such times, it’s not just you who is affected; your family could undergo hardships, too. To guard against this, it is important to ‘ring-fence’ your assets through the safety net of a private trust.

Or, in the event of a family dispute, even close-knot families can be shaken apart by the turbulence generated. This could well jeopardise your family wealth, and have an adverse impact on its distribution to future generations. Here too, a trust will come in handy to contain the disturbed situation, ensuring that whatever may happen, the members of your family will not have to compromise on their comfort and their lifestyles. Having a trust, in this case, will also help transmit instructions as to the handling of your family business in the future.

Getting into the gears: How do Trusts work?

A private trust is an entity created under the Indian Trusts Act, 1882. It serves to safeguard assets that belong to a defined group of individuals or beneficiaries. Trusts are designed to fulfil certain goals over the course of their existence, and trustees are appointed to make sure that the objectives are met. It’s important to note that the best time to create a trust is when all is well; creating one in desperation, when the going gets tough is counterproductive to the very idea of having a safety net in the first place.

Furthermore, there are other advantages as well, to having a private trust. It is a very useful thing to have in order to protect the interests of a child with special needs. The trust can be designed, in such cases, to act as a ‘virtual parent’ who can then address the financial needs of the child as he or she grows up. In a similar vein, a private trust can also take care of your requirements in times of old age. There’s no guarantee that we’ll never be alone in our late years, and while we can, we must provide for ourselves by planning for such an event.

Now, as to some technical points. Once the trust has been registered, you will receive a Trust Deed. At this point, it will be important to focus on the trust’s design, which your wealth manager ought to be able to help you with. When this is done, Trustees must be appointed to manage the Trust, keeping to its letter and spirit. The one for whom you are creating the Trust – say, your son or your daughter – will need to be named Managing Trustee, while your spouse, or other family member, will become the second and third Trustees. Bear in mind one critical point, though: if you are creating the Trust, you must not list yourself as one of its beneficiaries. If you do so, then this trust will not be able to serve as a safety net! The reason you do not list yourself as a beneficiary is that even if you become subject to liability, the funds in the trust cannot be attached, thus keeping your family wealth safe.

In addition, a private trust can also prove a highly effective vehicle for non-resident Indians (NRIs) to invest and preserve their money in India, safely and smoothly. The marvels of the private trust, especially for HNIs and UHNIs, never cease to amaze!

Where there’s a Will…

Remember that old saying, ‘Where there is a will, there is a way’? While it’s tempting to speculate that it might have been an astute wealth manager who came up with that, the wisdom contained therein, cannot be disputed!

While we’ve gone over the basics – and more – of the Private Trust, it’s also important to explore the flip-side of the coin: the Will. Now, it stands to reason that we cannot place every single unit of our assets within the safe confines of a trust. That is to say, there will always be a part of our wealth that will lie outside the legally-protected boundaries of any trust we may create. This is where having a Will can prove useful. It is a document that expresses ‘the wishes’ of an individual, laying down directions and instructions for the distribution of one’s wealth, after their demise.

It clearly and unequivocally puts forth the ‘Willingness’ of the individual to bequeath their assets as per their express wishes and desires. Two important points should be noted here: first, that a Will would become effective only after the individual has passed away, and the second, that a Will is not legally binding unless and until it is registered. A good wealth manager would not only help their client create and register a Will, but would also advise them to periodically rethink it, so as to reflect their most current wishes.

Why a ‘Will’ is a must

While a Trust is a separate legal entity in itself, a Will is merely ‘an expression of desire’. However, it is just as imperative to have one. Its absence can lead to disputes stemming from a lack of clarity on the distribution of the deceased’s wealth. To save your family from such undesirable situations, having a soundly drafted Will, devoid of any ambiguity, is crucial.

It’s good to have a private Trust, but it’s not a solution that’s needed for every single HNI or UHNI; it should be created depending on one’s needs and requirements. So, while a Trust is a ‘nice-to-have’, a Will, on the other hand, is a ‘need-to-have’ for readers like yourselves. Keep in mind, though, that Wills and Trusts go hand-in-hand. If you have a trust, or intend to create one, make sure that the objectives of both, your Will and your trust, are aligned with one another.

Need of the present: Uncomplicating the future

It’s simple, it’s obvious and it’s clear: estate planning is something that anyone with significant positive net-worth cannot and should not avoid. Yet, it’s something that tends to receive the step-motherly treatment, often deferred, and in some instances, altogether ignored. However, it’s important to entrust this task only to someone who is skilled in estate planning. Ideally, this would be your wealth manager, who has a responsibility to ensure that your wealth is managed wisely and holistically.

The importance of safeguarding your wealth through turbulent times cannot be understated, and neither can the value of estate planning in helping you do this. Planning for succession isn’t as daunting as you might have thought it was, and now that we’ve ‘uncomplicated’ the basics for you, you’re sure to succeed at it like the boss that you are!

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